Asteroids and Other Real Worries – Q1 2016
Dylan B. Minor PhD, MS, CFP®, ChFC, CLU, CIMA
Chief Strategist and Chief Investment Officer
Apparently, there is a greater chance that a massive asteroid will collide into earth in the year 2032 than we will win the lottery, according to NASA. The asteroid’s impact would create an explosion greater than 50 times that of the most powerful nuclear bomb. Now that’s something to be worried about! The good news is, thanks to SpaceX and others, we are likely to be able to purchase reasonably priced tickets to outer space by then (of course, it would be nice if a sufficient portion of earth remained for our return). In terms of actual likelihood, NASA says the chance of this happening is about 2 out of 100,000. For perspective, the chance of dying in 2016 as the result of a transportation accident is about 12 out of 100,000.[1] By 2032, your chance to have died by a transportation accident is about 192 out of 100,000, according to my calculations; this assumes that you use transportation every year and you (or your transporter) are not especially good or bad at transporting.
Meanwhile, we have some more immediate concerns. Although the current US presidential election has often been entertaining in a circus-like way, it has also given many cause for great concern. Consequently, many have been suggesting one candidate must be chosen over another (including my mother); even Ben of Ben and Jerry’s ice cream has become involved by creating a Bernie Sander’s ice cream. The container reads “Open Joyfully. Political Revolution Inside.” Though I haven’t tasted this particular flavor, it sounds tasty (you can see Bernie taste it here)[2]. Nonetheless, this was not enough to help him win the primaries in New York, which he lost handily to Hillary Clinton. At this juncture, it seems the most likely finalists are Hillary and Donald.
Many have asked: what’s going to happen if Donald or Hillary wins the presidential election? The good news is that history tells us the president has very little to do with stock market performance. Historically, the performance is instead related to which political parties are in power in Congress. After all, it is Congress that creates the laws of the land, some of which can have significant economic impact. Of course, the president can veto such a law, which is then very difficult to overcome. Nevertheless, the president does not make the laws and instead can only encourage Congress to do so (although, as Obama and others have shown, some meaningful policy can be created through executive orders). Regardless of which party resides in the Oval Office, if Republicans control Congress, the average stock market return has been an average of about 14.5% per annum. In contrast, the stock market return has been about 8% per annum during a Democratic-controlled Congress.[3] However, this return relationship is not strong enough to have any meaning. That is, it could have just as easily been the opposite result. This is the danger in finding relationships and considering them to be causal when in fact they are simply correlational, and possibly even spurious. A similar approach to the above example has found that both the winner of the Super Bowl and the average length of women’s dresses “predict” the stock market. In my view, all of these correlations are a chasing after the wind.
Trying to predict market outcomes, especially using dubious predictors, is not good science. Instead of predicting markets, we at Omega Financial Group have been using our proprietary States of the World Wealth Management® process, which means that we start with the end in mind to find a good beginning. For example, although we don’t know for sure what will happen this year in the US stock market, we do know for sure that at the end of the year, it will either have gone up, gone down, or stayed the same in value compared to today. And so we want to make sure that we have different portfolio exposures that can fare relatively well in these different possible states of the world such that we are not solely dependent on any particular outcome.
So what has been the state of the world this first quarter? I wrote a special commentary at that beginning of the quarter discussing how many were forecasting this year to be another 2008, since the stock market started the year off with a precipitous fall. Ironically, for the first quarter, US stocks still edged out a small gain. The SP500 was up just over 1%. Meanwhile, bonds, real estate, and emerging markets had a particularly good quarter. For stocks, value generally outshined growth. For bonds, longer and lower quality maturity performed better. Oil increased in price by over 10%, which helped energy dependent emerging markets. The softest spot was developed International stock markets that continued to absorb slower overseas growth. On whole, these markets succumbed to a loss of close to 3%, bringing the overall global equity market to a roughly zero return for the quarter. Meanwhile, the US dollar has now softened, which looking forward could aid US exports, as well as international stock returns for US (dollar-based) investors. In short, overall, there has been some modest financial market growth, especially when considering those assets beyond stocks.
The global economy in general and the US economy in particular continue to show signs of improvement. It seems we have begun to transition to “labor” instead of capital capturing an increased share of the economic growth. That is, workers are starting to earn more through greater wages, whereas earlier in our recovery it was company shareholders capturing the lion’s share of growth through increased corporate profits. This shift should translate into greater personal consumption, which represents almost 70% of the US economy. Nonetheless, with the seemingly never ending global challenges and surprises, elevated volatility is likely to continue, in my view.
But we should not be too worried about this “new normal.” Instead, our recommendation is to focus on some activities where the odds are always in your favor:
- See a recent movie or theatre production (chance of being entertained is 68.34%)[4]
- Enjoy a meal with friends or family (chance of an enjoyable time is 81.72%)
- Enjoy some wine and cheese at the next Omega event (chance of excellent wine is 93.57% and chance of superb cheese is 95.98%)
We look forward to visiting sometime soon! As always, don’t hesitate to write or call!
“This commentary reflects the personal opinions, viewpoints and analyses of the Omega Financial Group, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Omega Financial Group, LLC or performance returns of any Omega Financial Group, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Omega Financial Group, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.”
[1] See this cheery article for the odds of a variety causes of death.
[2] Note that this is not an endorsement of Bernie Sanders but instead the ice cream; Omega Financial Group neither makes political endorsements nor endorses politics.
[3] Based on analysis by Goldman Sachs over the period from 12/31/1946 to 12/31/2015.
[4] These probabilities are the author’s rough estimates based on personal experience